When most people think of starting a social enterprise they focus on the community benefit and often assume that it will need to be established as a charity.  While charities are a sound corporate vehicle for these activities, the rigours of the Charity Commission and charity law can be quite restrictive in nature.

An alternative company structure, which is proving popular with many social entrepreneurs, is the Community Interest Company (CIC). These are seen as a popular alternative to a charity as the assets are protected and the business operates within a formally structured legal entity.

A focus on community benefit

The Community Interest Company is a corporate vehicle for a social enterprise to operate within and can be created to deliver a specific community benefit. What denotes a community benefit is quite a wide concept, capturing everything from amateur sports clubs and music groups, through to healthcare spinouts and renewable energy projects.  The only notable restriction is that this structure cannot be used for a political aim.

Before commencing the process of incorporating a Community Interest Company it is important to seek both legal and financial advice to ensure that the precise needs of your social enterprise can be met by this type of structure.  In particular, the company will need to pass the community interest test.

The company will be incorporated and limited by shares or a guarantee.  This limits the liability of the members to the value of either the shares or the guarantee.

Advantages and disadvantages

There are a number of advantages to operating as a Community Interest Company:

• there is no requirement for trustees, but the reporting requirements of Companies House ensure transparency which in turn assists public confidence in the venture;
• there is a sense of permanence since, once incorporated, the assets are protected and will maintain a benefit to the community until it is dissolved, or its assets are transferred;
• it is comparatively quick, easy and inexpensive to set up; and
• directors can be paid, albeit within regulations.

In comparison to those enjoyed by a registered charity, at present there are no general tax incentives for Community Interest Companies but some may be entitled to limited business rates relief.  For example, depending on location, small business relief may be available where the business property's rateable value is less than £15,000 and the business only uses one property. Another example is enterprise zone relief which may apply to a business which starts or relocates to a designated enterprise zone.  The local authority where the enterprise zone exists will be responsible for the administration of this relief which can be up to £50,000 over five years.

Protecting assets

The key benefit of a Community Interest Company is that the corporate structure has a sense of permanence. Once incorporated, the assets are locked into the company via a mandatory mechanism contained in the Articles of Association; the company's constitutional documentation.  This asset lock prevents company property from transferring to a third party at less than its value.  If the company is dissolved, any property must be transferred to another social enterprise providing a public benefit.

Compliance requirements

Like all companies, a Community Interest Company must be registered at Companies House and will be subject to compliance requirements on an annual basis.  These requirements include the filing of annual accounts and a confirmation that the information held by Companies House is correct.  Furthermore, on an annual basis the directors are required to file a Community Interest Report which sets out how the organisation has pursued its community interests in the previous year. This report ensures that the social enterprise continues to have a community benefit and also improves public confidence by ensuring transparency.

For further advice on any of the issues raised in this article, or for commercial law advice more generally, please contact JPP Law on 020 3468 3064 or email info@jpplaw.co.uk.